The Bypass Trust: Using Disclaimers to Manage Large IRA Balances.

Trying to fund a bypass trust can be problematic if clients only have a residence and a large retirement plan as their major assets.

On the surface, a residence isn't a good asset for a bypass trust for two reasons: A trust doesn't qualify for the exclusion under IRC Sec. 121; and--probably most importantly--the surviving spouse generally wants to own the family residence.

Likewise, an IRA (or qualified plan) isn't the best choice for a bypass trust because of income taxes imposed on the retirement benefits. When the spouse is named as beneficiary of the retirement plan and all other assets are in a revocable trust, the first spouse's unified credit exemption can go unused.

This fact pattern may be a problem now, but will be more prevalent when the unified credit exemption equivalent amount reaches $1 million and higher. Beginning next year, we will be faced with funding larger bypass trusts. At that dollar level, avoiding the use of retirement assets will be almost impossible.

Required Minimum Distributions

The IRS issued proposed regulations in January 2001 to assist …